July 10, 2003

When Efficiency Is Bad

Tax "harmonization" in the EU is, as we already know, the Newspeak expression for enforcing higher taxes across Europe in a centralized way:

The EU's draft constitution would keep tax matters a national rather than a European issue. But this won't prevent would-be tax-hikers from finding backdoor ways to do it at the European level. It's already happening.

Besides the tax on foreign savings there are other targets, such as the charging of value-added-tax (VAT) on e-commerce transactions. At the moment VAT is paid on purchases made within the EU, but a new proposal would levy the tax on all transactions made over the Internet whether or not the company is based in the EU.

So far this has met with great resistance from the Department of Commerce and other representatives of the US administration in Washington. It is also, quite understandably, being opposed by internet providers and e-tailers who already have a tough enough time succeeding in Europe. However, their outcry has not stopped Brussels from pursuing the issue and the debate could become as contentious as the one over GMOs.

In most cases, harmonization improves the efficiency with which things are done in Europe. But with taxes it has the opposite effect. Increased tax levels will make it harder for European businesses to operate effectively and they could choose either to move their operations outside of the EU, as German manufacturers are doing already, or find ways to avoid the tax.